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Examining the importance of Cultural Due Diligence in M&As
How do you view mergers? Are they a necessary evil to prop up a failing company or a force for good enabling synergy and cost savings? Whilst the initial announcements of mergers and acquisitions are always up beat, the follow up news brings more mixed messages.
Just looking at one example, the mass-merger of UK banks was heralded as the saviour of the banking crisis. Yet just a few years on the Government is keen to split these super banks into separate retail and investment arms as well as making it easier for new “challenger” banks to set up in our high streets. Ironically this move towards smaller bank units is coming at a time when Spanish Banks are indulging in their own wave of mergers.
In more bad news, a guidance document on Higher Education mergers prepared by the HEFCE in 2012 estimated that in the commercial sector between 50% and 75% of all mergers fail outright or do not achieve the expected benefits. Worse still, a study in January 2012 by the Department of Health concluded that “hospital mergers do not benefit patients and are unlikely to be the most effective way to deal with financial problems.”
So, why in the face of all this negative evidence do we continue our love affair with mergers? And in no small way either. The ONS report in March 2012 on the value of mergers and acquisitions involving UK companies revealed that in 2011 expenditure by overseas companies acquiring UK companies amounted to £32 billion, expenditure by UK companies acquiring overseas entities amounted to £50.8 billion, whilst UK companies also spent £7.6 billion in acquiring other UK companies.* Furthermore a more recent survey by Appleby revealed that offshore M&A has risen by 25% in the first quarter of 2012.
The answer is that when a merger works it can totally transform a company, not only bringing cost savings but also drawing on combined strengths to truly enhance the product offering. Successful mergers start with a clear idea of how the merger will work followed by some extremely thorough due diligence. This should not only encompass areas such as financial, product and legal considerations but should also delve deeply into the cultural aspects of the organisations.
The truth is that whilst many reasons are given for the failure of a merger, at heart it is usually the failure to merge cultures and engage employees in the values of the new organisation which leads to the downfall of a merger. Even something as simple as the merging of two accounting systems can be doomed to failure if employees continually put up barriers to transfer. Cultural due diligence will not only highlight the potential discontinuities but will also suggest ways in which the formation of a new culture can take place.
Of course, cultural due diligence may highlight some areas in which there is a complete conflict of culture. For example, businesses which have devolved from the public sector may be strongly process driven whilst entrepreneurial private companies might lack process but be highly creative. This cultural mis-match can be strongest when working across international boundaries. Whilst being careful to avoid racial stereotyping it is true that different cultures can approach the workplace in alternate ways. It is however important to identify the reality via a cultural review rather than assume that the stereotype is correct.
Whatever the cultural differences, whether process v innovation or taking ownership of a problem v passing it through a hierarchy, the key to a successful merger is the identification of these differences and the utilisation of them to enhance the strength of the new organisation. Process, innovation, hierarchy and flexibility all have their place in an organisation. Creating a culture which is a blend of strengths will help to ensure the success of the merger, as will engaging the hearts and minds of the employees in the new venture.
The Law society Gazette summed this up best in its article on mergers in January 2012. Among its top tips were:
*The statistics gathered in this report only tally mergers and acquisitions with a value in excess of £1m.